Fintech is re-calibrating: here’s what founders need to know

Over the past two years, fintech operators across the globe have done a terrific job of bringing technology to many areas of the financial services market. Innovation across digital banking, mortgage origination, SME and SMB offerings has accelerated, with fintechs often taking on more risk than traditional financial services institutions to gain market share. 

It is easy to overlook the progress made in this short space of time against the backdrop of gloomy media headlines. But as interest rates rise to combat inflation, uncertainty surrounds the future of the fintech market. So, what do current macroeconomic conditions mean for fintech founders?

Adjusting to new conditions 

The wider economic landscape means that fintechs must adjust their revenue models to meet new paradigms. 

American neobank Varo, for instance, is moving from a fee-based business to a SaaS model as it shifts revenue streams. Brex, meanwhile, originally positioned as a corporate spend management solution for bootstrapped SMEs, has pivoted to pursue larger customers and continue its push into software. Cash will now come predominantly from more diversified and predictable sources: recurring revenue from subscriptions, in addition to interchange fees. 

‘Battening down the hatches’ is not necessarily a bad thing in this context. By investigating new routes, fintechs are continuing to push the innovation needle forward, and refocusing on business fundamentals. For consumers, this will result in more offerings being introduced as challengers and incumbents alike compete to remain relevant. 

On the B2B side, we’re seeing the ‘Amazonification’ of solutions. As macroeconomic conditions shift customers’ behaviours, super apps are rising to meet them at their point of need and deliver all-in-one solutions. Evolving needs mean that SME fintechs are now increasingly adjusting offerings to include working capital, expense management, accounting, VAT and more, all within one core solution. 

First movers will race to integrate as many tools as possible, delivering one product to rule them all. This trend is exemplified by Revolut, which is pushing hard on adding ancillary services to become a fully baked-out solution, unlike its immediate rivals. It is bringing business and retail banking under one roof – offering everything from stock trading and expense management to on-demand pay and money transfers. 

The M&A and investment landscape 

Fintech is recalibrating, not disappearing. The M&A opportunity has therefore become obvious; there’s an abundance of amazing technology in the market today, and we'll likely see well-funded fintechs continue to make consolidation plays across their ecosystem. 

As we look at week-on-week funding on a micro scale, what stands out from the capital raising side are the many infrastructure providers who are capturing investors' cash. Firms that are demonstrating the value of their technology and delivering custody, payments, card issuing, and expense management are commanding everyone’s attention. These businesses offer platforms that will provide the building blocks on which to create new and innovative solutions. 

Things are changing on the investor side too. The bell curve has shifted: funding is increasingly concentrated on either early-stage or late-stage deals. Valuations of mid-stage companies have become too expensive, so investors are shifting their sourcing to the value in early-stage, or safer bets at the top. 

Meanwhile, there is a much stronger focus on capital efficiency over high growth. Whilst founders will always be under pressure to demonstrate rapid growth, they are now equally being assessed on their ability to streamline their business and focus on their core proposition. Many funds on the early end of the investing spectrum are looking for a 1:1 ratio between revenue and capital raised, to prove the underlying fundamentals of a business. 

Challenging markets can be an opportunity – they help SMEs mature and give founders the chance to show what they’re capable of. We don’t need to look too far back to see how much the fintech space advanced during the last period of global slowdown throughout Covid-19. Following the massive ramp-up of fintech, now is the time for businesses to navigate the trough of disillusionment and manoeuvre through the curve of mass adoption. It’s time for founders to introspectively assess whether this is the time to rejig their business into something that can be profitable in 12-18 months. 

Time to secure extra investment or tighten belts?

This is a question that many business leaders will be mulling over right now. After all, every founder wears two hats: one for running the business, the other for making sure they have enough money to keep the lights on and people employed. 

In trying times like these, founders must be clear on their long-term roadmap. They must show investors incremental growth and cash flow efficiency with the current amount of money raised, yet also explore opportunities for M&A and product expansion. Fundraising and running the business are by-products of one another, not mutually exclusive. 

Founders should continue to focus on the current business, whilst strategically thinking about how they could consolidate their offering or implement solutions that will bring strong returns on investment – this will determine when a capital raise may be necessary. That said, it’s important to remember the hare and the tortoise – those taking it slow and steady will likely win over those who burn through cash without a solid and sustainable plan. 

Another important consideration to bear in mind is that equity is not the only option on the table. For founders exploring cheaper, less dilutive options, debt financing can offer a secure lifeline that they can draw up and down on as needed. While this option comes with its own considerations, it is an often-forgotten option for founders looking to raise capital and fund growth. 

What does the future hold?

Globally, fintechs raised US$125bn in VC funding in 2021. This astonishing growth necessarily comes with a caveat; no industry can sustain exponential growth indefinitely, so a period of readjustment was due. 

We’re at an inflexion point where things are reverting back to the mean. Money is still readily available for visionary entrepreneurs and proven business models. Meanwhile, companies with more measured valuations have become attractive targets for acquisition and investment, spurring activity across the investment and M&A. 

I challenge the notion that doors are closing to fintech operators. On the contrary, they have been gifted a fresh opportunity to pause, reassess and pursue changes that will strengthen their business fundamentals. As with any ‘cooling off’ period, the industry will come out of the other side stronger and reinvigorated.

About the author: John Clark is Managing Director of Royal Park Partners, a firm of corporate finance advisors focused on fintech. With offices in New York and London, the firm provides transaction advice to entrepreneurs, founders and private capital funds all the way from initial capital to a trade sale or IPO.